Monday, March 30, 2009

News From BOM Correspondents - 18


The unwelfare state

Latest news and links:

State Propaganda Costs

The government is now Britains' biggest ad spender, costing us £400m pa. Projects have included a £30m drugs campaign featuring such gems as: "Some people get the giggles after using cannabis, you may laugh at the most random things."

With commercial advertisers slashing budgets, the nanny state is now vital to the ad industry. The airwaves and newspapers are crammed with nanny's important messages on everything from global warming to homophobic thought crime.

George has promised to stop it. We'll need to make sure he does.

(HTP Steve)

40% Jump in EU losses

Following Bliar's surrender of our EU rebate, our budget contribution has soared by 40% to £6bn pa (£250 pa per household).

At the same time, fraud and other irregularities in the EU budget rose by 20% to €1,392 million (£1.3billion) - and that's just the bit we know about.

That's what I call a moneypit.

(HTP Jeremy P)

Pigs, Porno, and Plugs

The snufflings at the trough have now become so obscene I've instructed Mrs T to avert her gaze.

Worse, the latest revelations about Jacqui's expense claims and her marital arrangements are making us a laughing stock all around the world. As the Australian broadcaster ABC puts it:

"Secretary caught in porn scandal on the Home front

The British minister in charge of security for the G20 Summit... has been forced to apologise for submitting an expenses claim which included two pornographic movies which she says were watched by her husband, who also happens to be on the Westminster payroll."


How dare these odious people presume to tell the rest of us how to live our lives?

How dare they help themselves to our cash?

And how dare they make me a laughing stock? I can do that perfectly well on my own.

(HTP Digger)

Contact the dead via the taxpayer

"A PAIR of psychics have been given £4,500 of taxpayers’ money to help grieving relatives “contact the dead”.

In a move branded a disgrace and “hocus-pocus”, mediums Paul and Deborah Rees were awarded the sum to teach people how to contact “the other side”. The couple won funding for their psychic school at Bridgend, South Wales, as part of the Government’s Want2Work job creation scheme."

(HTP Nigel P)

Fantasy Government

The government has spent £20 grand on setting up a so-called "innovations centre" on the Second Life virtual world website. It's costing a further £12,000 a year to run, even though it is not accessible to the public.

They say: "Our new innovation centre in Second Life is a virtual area where both government and private companies can showcase technological innovations, such as low carbon footprint technology. We believe it could help make sharing technology more efficient and save taxpayers' money as meetings, events and shows can be held online at a fraction of the cost and resources."

We say: FFS! Don't you guys already waste enough of our cash on half-baked techorubbish without paying to play online games?

(HTP Jim M)

Reality Welfare

Too fat to work:

"They weigh 80 stone, claim thousands in benefits - and can't work. Who do they blame? Anyone but themselves.

There's something a little surreal about listening to a family with a combined weight of nearly 80 stone falling over themselves to explain how little they eat. 'Some days I barely eat at all,' declares Emma Chawner, daughter of the house and, at 17 stone, its lightest occupant. 'I don't have breakfast most days. Sometimes I don't have lunch either, and might only have a salad roll for tea. I'm always eating lettuce and apples and stuff.'

It's a fantasy all right, but we're to blame. We're the ones funding £22 grand a year to house, feed, and clothe the Chawners of Blackburn (pic above). And to keep them in all the saturated fats, sugar, and Gaviscon they will ever need. Why should they work?

Jamie Does The EU

The TPA has published a new report on the costs of the EU Common Agricultural Policy, accompanied by the outstanding vid above.

Here's their cost summary:

So that's £400 per household every single year. £400 we would avoid if the the CAP didn't exist.

Friday, March 27, 2009

Lagacy Of Rubble


All that remains of state education

This government will surely go down as one of the worst we have ever had. It took a golden legacy and in little more than a decade, reduced it to a pile of rubble.

Destruction of the economy is total, and will take at least a decade to repair. But we sort of expect that from Labour- they are socialists, and destroying economies is what socialists do. If that's not what you want, you shouldn't elect them in the first place.

Their really shameful acts of destruction have been in our public services - the very things they promised to "save" from the heartless Tories. And nothing is more shameful than their systematic dumbing down of education.

We've blogged this many times before, and here's our depressing summary:

  • Pre-primary skills among five-year olds are unchanged despite a £21bn programme to improve them (see this blog)
  • 3Rs skills among seven-year olds are stalled, with eg 20% failing to reach the minimum expected standard in writing (see here)
  • 3Rs skills among eleven-year olds are stalled, with 60% failing to reach the minimum expected standard in reading, writing, and maths (see this blog and this)
  • Core attainment among fourteen-year olds is also stalled, with nearly 40% failing to reach the minimum expected standard in English, maths, and science (see here)
  • At GCSE 54% still fail to gain 5 A-C grades including both English and Maths (see excellent Chris Woodhead article here)
  • A Level results continue to soar, but we now know they are two whole grades easier than twenty years ago (see this blog)
And that's just our schools - beyond that, another bonkers target-driven programme has been dumbing down our unis as well.

The destruction of state education is now a painfully familiar story, and to be honest with you, it was making us so depressed and angry, we stopped blogging each fresh horror. But this week we've had a couple of items that really have to be clocked.

First, we had a proposal to scrap the teaching of history in primary schools in favour of lessons in Twittering. According to the Guardian:
"Children will no longer have to study the Victorians or the second world war under proposals to overhaul the primary school curriculum. However, the draft plans will require children to master Twitter and Wikipedia."

It's such an outrageous suggestion, you wonder if it's a deliberate wind-up aimed at people like us (as James Delingpole suggests here). But it isn't - it's a serious proposal drawn up by Sir Jim Rose, the former Ofsted chief (ie Mrs McNulty's predecessor).

One thing's for sure - the only children on whom this nonsense will be inflicted are those whose parents cannot afford private school fees. Paying customers would never accept it. Paying customers who have the freedom of making their own choices almost invariably choose what the state education commissars disparagingly refer to as "traditional education".

And then today, we have the exams standards quango Ofqual confirming what most of us already knew - that the standard of science GCSEs has fallen through the floor, and urgent action is required to repair the damage.

As it happens, the extent of the dumb-down in GCSE Science was vividly documented 18 months ago on Amused Cynicism. You should go and read the post - and the attached full scan of an actual Edexel GCSE Science paper on physics - but here's a quick taster:





Note how you don't need any knowledge of physics whatsoever to answer the questions - and that last one is taken from the supposedly "hard" section of the paper.

In the spot where state education once stood, Labour are leaving nothing but a huge crater.

But at least here, the Tories have a clear plan - the Swedish model of state funded independent schools and parental choice (aka education vouchers). And in Michael Gove they've got someone who sounds like he might actually deliver it. He needs to get started on Day One.

PS Gove has been telling the Economist about his plans (see article here). And in the audio version of the interview - well worth listening to - he quotes a truly shocking figure. It turns out that the Department for Children Schools and Families spends less than half its £64bn pa budget directly in our schools. Where does the rest go? He doesn't say, but we do know that an extraordinary £11bn pa goes on unfunded teachers pensions.

Thursday, March 26, 2009

Gilt Strike


These patriotic gents would never have taken strike action

Yesterday's failed auction of 40 year gilts underlined a few ghastly truths we may possibly have mentioned once or twice before.

Let's start by asking whether you would be prepared to lend to the UK government? Right here and now. Today.

In particular, would you lend the government money at a fixed interest rate of 4.25% for 40 years?

Just consider the risks.

First, lending fixed rate money to any government for such long periods lays you wide open to default by inflation. True, UK inflation has been very subdued during the last decade - just 1.8% pa on the CPI measure. But over the last 40 years it has averaged nearly 7% pa. And a repeat over the next 40 years would mean you'd lose around 60% of your investment in real terms.

Sure, it's possible the government will stick to its 2% inflation target for the next 40 years. And sure, it's possible that the Bank of England will somehow deliver it. But with a mountain of debt to work off, our currency already stuffed, and the printing presses roaring, it's rather more likely gold pigs will fly out of my butt.

Second, the supply of new gilt issuance over the next several years will smash all previous records. It will be humongous:

Supply on this scale is bound to put downward pressure on gilt prices (and upward pressure on yields). So why would you buy now when you will be able to buy much more cheaply down the road?

Third, gilt prices are currently propped up by the Bank's programme of Quantitative Easing. They are using up to £150bn to buy bonds on the open market, and virtually all of them are gilts.

That's fine for existing gilt holders, because they can sell out at premium prices artificially inflated by The Simple Shopper With The Big Purse.

But for anyone thinking of buying gilts, they are now faced with prices which have been temporarily ramped by the Shopper. What's more, at some stage (TBC), the Shopper will flip-flop and start selling. Prices will then plummet from their artificial highs down to artificial lows. Clearly, the Shopper will make an horrendous loss on the whole deal, but hey, he's the Shopper, and he doesn't care because it's not his money.

But you care. And why would anyone of sound mind ever want to be on the same side of the market as the Shopper?

So no - you wouldn't have been any keener on those gilts than the investors who failed to show up yesterday.

And you must be wondering why anyone would be buying right now?

Well, some investors have little choice. In particular, pension funds need to buy in order to match the future liabilities to their pensioners. They're forced to do that under government regulation. Insurance companies have similar needs for matching assets, and taken together these investors hold getting on for half of all outstanding gilts.

Investing in gilts is purportedly their low risk strategy - gold-plated security and future investment income matched to future cash liabilities.

Unfortunately, when inflation accelerates, for the pensioners who actually need the cash, it's very far from low risk. As they get older, they will discover their gilt-funded pensions buy less and less with every passing inflationary year.

But hey, by the time that happens, this present lot of politicos will have long gone. Starving pensioners will be someone else's problem.

Much more concerning in terms of the government's current funding problem, is the question of overseas investors. Over the last few years they have become vital to government funding, quadrupling their holdings of gilts:



When last sighted they were holding 36% of all our gilts - double the percentage just five years ago. And unlike Britain's pension funds, they do not need to buy gilts at all. They could easily switch their funds anywhere else in the world. What if they go on strike and decide not to buy?

The answer is we'd be well and truly in the mire.

Of course, words like "strike" are a bit misleading. G7 governments can always expect to get funding. But at a price. It's price that's the real issue here.

At present, our government is able to borrow long-term for 4% or so. But once those crucial overseas investors realise the Great Gordo doesn't have a clue what he's doing, things will look very different.

How expensive might it get?

Back in the bleak 1970s, long gilt yields reached 17%. At that level, £1 trillion of debt would cost us £170bn pa to service.

Or 13% of our GDP.

Ouch.

PS Today's gilt auction was much more successful. But that's because it was an issue of index-linked gilts - ie inflation protected. And with the higher inflation to come, such gilts will be much more expensive for taxpayers.

Wednesday, March 25, 2009

Purging The Treasury


There will need to be changes and re-education

Governorspeak:

“There is no doubt we are facing very large fiscal deficits over the next two to three years. Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits. The level of the fiscal position in the UK is not one that would say: 'Well, why don’t we just engage in another significant round of fiscal expansion?’ ”

Translation:

The money has run out. Our tax base has collapsed, public spending is through the roof, and government borrowing is higher than it has ever been in our entire peacetime history. On top of all that, we have already hocked our great-granchildren to a bunch of foreign money-lenders, who are starting to get very twitchy:



In short, we are in the worst doo-doo since the Black Death.

Unfortunately, whereas in 1348 the fabled Edward III was at the controls, this time we're in the hands of a deranged spendaholic who knows he has only months to live.

Believe me - unless he's stopped, he'll take us all down.

*****

Since yesterday's shock attack on Gordo by Governor King, we've been treated to 24 hours of frantic spin as to what he actually meant. Treasury minister Angela Eagle was sent onto Newsnight to say that he was actually supporting Brown, but she was so unconvincing it was embarrassing to watch. Geoffrey Robinson was less embarrassing on R4 Today, but just as unconvincing.

The most interesting line comes from sources who wish to remain anonymous, but who may be based in the vicinity of 1 Horse Guards Road. It says that the Governor was actually speaking up in support of embattled patriots inside the Treasury.

The story is that these patriots are engaged in a desperate struggle to stop Gordo doing any more damage. Supposedly, they know as well as the rest of us that his intended second fiscal boost is unaffordable and that it may shatter confidence in the gilt market.

So patriotic Old Skool Sir Humphries have finally summoned up the courage to speak for Britain in the face of Labour's fiscal lunacy. Well, more precisely, they've summoned up the courage to ask the Governor to speak for Britain.

Hmm. It all sounds pretty rich coming from a department stuffed full of Brown appointees, and which has happily gone along with one of the biggest public spending splurges Britain has ever seen. Less than two years ago they were even lining up to applaud him on live TV:




An eleventh hour conversion to spending restraint - even if true - is about as convincing as those Nazi generals who attempted to treat with the Americans in early 1945.

George is going to need his own people, and the denazification of HMT has to start at the top.

Let's hope he's got a mole who can identify some real Old Skool internal candidates for early promotion. It will be a telling commentary on 13 years of Labour misrule if he has to bring in outsiders.

Tuesday, March 24, 2009

Inflation Accelerates


As we've blogged many times, our currency is being systematically debauched. Interest rates have been slashed, the printing presses are roaring, and savers are being raped.

It's all being done on the pretext of fighting the bogeyman of deflation. Deflation, we are told, will destroy our economy and leave us in Japanese-style penury.

Never mind that Japan's per capita GDP is still virtually identical to ours despite their supposed "lost decade", and despite our 15 years of unsurpassed nomoreboomnbust. And never mind that inflation is just as good as deflation at destroying economies, and that as the 70s showed, you can easily end up with inflation and recession side-by-side.

And where exactly is this much touted deflation?

We were told that it would break cover this morning in the latest inflation stats from the ONS. All morning the BBC was saying that the year-on-year RPI would go negative for the first time in 60 years.

But guess what - it hasn't. It's actually just shaded down from 0.1% in January to zero in February. And that is entirely down to the sharp fall in mortgage rates - the RPI excluding mortgage costs (RPIX) is running at 2.5% pa, up from 2.4% last month.

Worse - for our deflationary scaremongers - inflation on the CPI measure, which is the government's preferred measure, has actually increased.

Let's say that again:

INFLATION HAS INCREASED

The price of food is soaring - up 12.5% year-on-year (compared to 11.1% last month). The price of non-alcoholic beveridges is also increasing faster. Drink and tobacco are going up faster. And many imported items like clothing and footware, which have been falling in price for a long time, are now falling less fast because of the weakness of sterling.

Right across the board, inflation is accelerating. The ONS groups its CPI shopping basket into 12 major headings, and all bar one show higher annual inflation compared to last month's figures. The one exception is domestic fuel supplies, but even that can offer only the scant comfort of an inflation rate falling from 36% to 23%.

You need to remember this the next time you hear someone spouting about the dangers of deflation.

We haven't got deflation.

It's not your imagination increasing the price of your supermarket trolley.

Our clothead rulers are turning a drama into a crisis.

Not Cricket


A vast improvement on WG Grace

So if the Indian cricket circus relocates to us, who pays?

The English cricket authorities - the self-same wallies who got into bed with conman Stanford - are slavering at the thought of all the dosh they'll get, and they're talking wildly of £100m of wider economic spillover effects. But who's going to pay for the huge security operation?

Let's recognise a few facts:
  • This tournament is being relocated from India because it will be a target for Islamic terrorists and security is a major issue
  • There are plenty of Islamic extremists living right here in the UK
  • There is less than a month to organise the thing - so far there is no security plan
  • The police have not been consulted and have grave reservations - not least because the tournament clashes with a number of other security nightmares (see here)
  • Security always ends up costing far more than originally announced - the projected bill for 2012 is now approaching £1bn

The week before the tournament, the G20 summit will have drained police resources from all around Britain, will have cancelled all police leave, and will have landed taxpayers with a £50m bill (see here). The very last thing we need is another expensive high-risk circus immediately afterwards.

PS And talking of tax-funded circuses, far be it from me to question Boris. But just how much is he going to spend on this St Georges Day jamboree? When last sighted, Green Ken's St Paddy's Day was costing us £100 grand pa (see here).

Monday, March 23, 2009

Abhoring A Vacuum



Tyler spent most of the weekend reading Cam's speech on Fiscal Responsibility with a Social Conscience.

It's actually not that long, but Tyler found he couldn't read more than a couple of sentences at a stretch. Beyond that, he was overcome by waves of dizziness, nausea, and sharp pains in his joints: it seems his body is just not equipped to deal with a vacuum, especially an economic policy vacuum.

The speech has already caused a lot of pain for its lack of ambition on public spending cuts. And reading it, we were unable to find anything - apart from abandoning the ID cards and child database projects - that could not have come from the lips of the present government: just more arm-waving about efficiency drives, cutting waste, bashing "quango fat cats", gripping tax credits (somehow - TBC) etc etc. We've heard it all a million times, and it doesn't cut the mustard.

On taxes, traditional Tories are in despair. The speech offers nothing to tax cutters, and Lord Tebbit reckons that policy is being driven by focus groups. Why else would George have pledged to go ahead with Labour's new 45p top income tax rate, even though it will raise at most £2bn pa? As Tim Montgomerie says:

"We are told by the Tory leadership that it's too early to say what a Conservative government will do on public spending but it's not - apparently - too early to say we'll accept increases in taxation."

But the most depressing thing - the vacuum at the centre of Cam's speech - is the absence of any recognition that tax cuts are an essential condition of long-term sustainable recovery.

Of course, we have a debt crisis, and of course, public borrowing must be reduced. But the single most important driver of that reduction will a return to economic growth, which will lift tax revenues and cut welfare spending.

According to HM Treasury's rule of thumb, a 1 per cent increase in output cuts public sector borrowing by just under ¾ percentage points of GDP - which in today's money is £10bn pa. Which is five times more than George can even hope to raise from his new 45% tax band - and the latter makes the former less likely.

Hobbling the recovery with higher tax rates is the very last thing any government should be doing, least of all a Tory government.

As we've blogged many times, what we need from Dave and George is a proper fiscal strategy. Sharing the proceeds of growth was never more than a good soundbite for good times. The lean and hungry times we now face demand some policy substance.

The focus must be on Labour's bloated public sector - we're all agreed on that. But what we need is a clearly specified plan setting out a quantified path for cutting public spending as a percentage of GDP over the medium term. Everybody - our international creditors included - would then know where we stand.

Saturday, March 21, 2009

Treasury KISS


The National Audit Office Report on the Nationalisation of Northern Rock gives us a shocking insight into HM Treasury's lack of preparedness for the financial crisis.

The stark fact is that when Northern Rock got into difficulties in August 2007, there was absolutely no official plan for dealing with it.

No secret blueprint locked in the safe.

No action list.

No disaster recovery team.

Nothing.

They had to make it up as they went along.

Worse, it was the Treasury's cack-handed support operation, along with the associated media coverage, that actually triggered the pavement panic.

Which in turn led Darling/Brown to panic into a full deposit guarantee for Crock customers. Which naturally led customers of other banks to panic, panicking Darling into giving a full guarantee to anyone who had lent any money to any UK bank. Which finally ended up putting taxpayers on the hook for bank liabilities equivalent to nearly five times GDP (see here for BOM's commentary during black September 2007).

So why - you may politely enquire - didn't HMT have a plan? After all, by early 2007, any fule know that the Crock had gone crackers, and was dicing with depositor confidence (as we've said before, even dim-witted Tyler had withdrawn his cash by then). Didn't anyone at HMT, the Bank of England, or the FSA see there was a problem?

Well, it turns out they did see something along those lines (para 4.3 in the NAO report):

"The Tripartite Authorities had identified weaknesses in the arrangements for dealing with insolvent institutions posing a systemic risk some three years before the crisis at Northern Rock. Since 2004, the Tripartite Authorities have conducted exercises to test their preparedness to deal with a range of scenarios, ranging from the simulation of a cyber attack on financial infrastructure and the impact of flu pandemic to various financial crises.
One of the first scenario exercises, in 2004, tested the options available if a major financial institution got into difficulty for liquidity reasons. The report of the exercise noted that thinking was relatively undeveloped as to how the resolution of an insolvent firm with systemic repercussions would be handled and by whom."
So in among their usual implausible doomsday scenarios such as UFO attack, they did at least include the elephant in the room risk - a bank running out of money. And they also recognised they were not equipped to handle it. Which ought to have scared the pants clean off their spotty mandarin behinds.

But in that case, WTF didn't they do something to prepare? After all, this was three years before the crisis broke, and by 1936, even Stanley Baldwin had acted to rearm.

The answer is very simple:

"At that stage, improving the existing arrangements was not considered within the Treasury to be a priority, in the benign economic environment then prevailing."

In other words, Brown's Treasury had fallen for its own propaganda: it actually believed it had abolished boom and bust, and discovered the secret of eternal life. It didn't need to waste time thinking about how it would organise a funeral.

As has been reported, the NAO also uncovered a raft of other HMT failures.

Like how the Crock was allowed to advance a further £800m of crazy 100%+ mortgages even after HMT had stepped in to prop it up.

And like how HMT hired Goldman Sachs to find a buyer on the basis of a "success fee", without ever bothering to specify what actually constituted "success" (Goldman eventually got paid £4.8m, out of the total £27m paid to HMT's advisors, with a further £42m in advisory fees paid by the Crock itself - all of which has now been picked up by taxpayers).

What this highlights is that, when it comes to the financial markets, HMT cannot be trusted to make sensible judgements. Whether because of political pressure (don't you dare call time on the boom), or because of incompetence, they have shown themselves to be incapable of making the right calls.

Whatever the shape of future financial regulation, we should make absolutely sure we Keep It Simple Stupid. Expecting HMT to do the right thing when the time is right is courting further disaster.

Thursday, March 19, 2009

Brown's Legacy - World's Biggest Deficit


The latest IMF forecasts are an alarming read. They predict the first global downturn since WW2, with all the risks stacked on the downside.

For us, there's even more need to worry. According to the IMF, we will soon have the biggest government deficit in the world (or at least among the G20 nations). By 2011 we will be borrowing a banana republic style 11% of GDP - miles higher than we have ever borrowed before in our entire peacetime history.

In contrast, Germany will be borrowing 5.2% of GDP, France 6.2%, and "high deficit" Japan 8.2%. Even the-source-of-all-our-problems US will only be borrowing 8.9%.

This month's public finance figures confirm how quickly our position is deteriorating. Borrowing in 2008-09 is running £52bn ahead of where it was this time last year, and tax receipts are down by £15bn.

When Dave and George take over, they will face a worse fiscal mess than any incoming government in Tyler's lifetime. They will need to be as hard as nails.

Latest Skills Industry Fiasco


Tumbledown FE provision

BOM readers will be familiar with the abysmal nationalised skills industry (see previous posts here - including video - here, and here).

The industry is "controlled" by the Learning and Skills Council (LSC), a sprawling dysfunctional quango that presides over a quagmire of 500 separate organisations and bureaucracies. It costs us over £12bn pa, yet fails almost entirely to deliver the skills employers actually value.

This morning we have news of their latest fiasco - their grandiose college rebuilding programme has imploded because the money's run out:

"Colleges in England have indicated they face losing more than £100m because of delays in getting funding they say was promised for refurbishment. Some 144 building projects are on hold while funding is being reviewed by the Learning and Skills Council."

This is a serious problem because in many cases the colleges have already started the projects, incurring big costs. There's now a real chance some might go bust:
"Barnsley College (pic above) is half demolished with rebuilding work due to begin in May. Its principal said it looked as though the contractors would have to make people redundant.

He said the situation "could end up bankrupting the college" because he had taken out bank loans on the basis that the work would be done and students - with associated funding - would be taking up places in the new buildings. Without the buildings, he has no student income and no way of repaying the loans."


Further Education Minister Sion Simon was thrust before Humphrys on BBC R4 Today to explain.

Only he couldn't.

In a stammering embarrassing performance he just kept repeating the classic robotic lines we've heard so often:

"We've made it quite clear this is unacceptable."

But you're responsible!

"No. Ministers make policy and the LSC is responsible for administering the policy."

But the LSC reports to YOU!

"Which is precisely why we've ordered an enquiry."

Well, that's just buck passing - who's taking the rap?

"That's what we're enquiring into"

Gah! Are you going to let these colleges go bust?

"Well... er... umm... unacceptable... LSC's fault... enquiry... rrrrrrr... click..."

Are you going to let them go bust?

"We've made it quite clear.... rrrrrrrrrrrrr... click click click..."

Some might say you bailed out the banks, but not these colleges!

"We will expect the LSC to deal urgently with their situations. We are absolutely not willing to see colleges go bust."

Absolutely not willing to see colleges go bust. WTF kind of tortured doublespeak pants is that?

Sion Simon is of course a notorious twok, whose only previous claim to public attention was his hilarious video spoof of Cam:





The question is why would anyone entrust a £12bn industry to a failed comedian?

And the answer is they wouldn't.

Except in government of course, where it's perfectly normal.

How do we get rid of them again?

Wednesday, March 18, 2009

Third World Hospitals


Nearly three times more money, and it comes to this

We've all seen the shocking reports of disgusting conditions at Mid Staffordshire NHS Foundation Trust: lack of trained staff, lack of equipment, filth, unreported superbugs, patients left in pain, targets given priority over patient care, etc.

Commissar Johnson was on telly last night claiming it's an isolated case - another one (cf the Kent and Snuff It etc etc). But as the Doc points out:

"Every single one of the problems listed above has been covered time, after time, after time, after time by NHS BLOG DOCTOR...

Be under no illusion. What went on in Staffordshire is probably going on in a hospital near you. It may not be as bad. Yet. Or, it may be just as bad, but even now is being hushed up. Maybe you do not believe it. But one day soon, you (or more likely your elderly mother or father) will be admitted to hospital. Then you will know."

Judging from our own experience, almost everyone already knows. They're both angry and worried sick.

So one more time:
  • Stalinist healthcare has had its day - if it ever had one
  • Commissariat targeting has been a disaster - it has given us box-ticking at the cost of patient care
  • Authority must be returned to the frontline - shooting failed managers is useless if they never had the right authority in the first place
  • Customer power must reside with patients not Commissars
  • Government inspectors are no substitute for customer power - inspectors somehow deemed this hospital suitable for Foundation status despite its manifest failings; worse, the failures were eventually flagged up not by the official inspectors, but by a privately conducted statistical analysis of comparative mortality rates (Dr Foster Intelligence)
  • We need continental-style social insurance soonest - choice and competition really are the only way to drive sustainable improvement

Before Labour came to power - 12 WHOLE YEARS AGO - supporters of the NHS used to argue its third world healthcare resulted from underfunding. They pointed out that the UK spent much less of its GDP on health, so of course the results were worse.

But under Labour, NHS funding has gone through the roof. This year we'll be spending around £110bn, up from £40bn in 1996-97, an increase of 170%. Over the same period, the CPI - the government's preferred measure of inflation - increased by a mere 25%. Tyler's fag packet says that our total healthcare spending (public and private) is now running at around 8.7% of GDP, which is roughly in line with the OECD average.

Unfortunately - as we've blogged many times - much of this extra money was wasted on grandiose top-down masterplans like the supercomputer and the so-called Quality and Outcomes Framework (QOF - see the Doc's latest blast here). Costs escalated wildly, including PFI costs that will hang round our necks for decades to come.

And our hospital standards still seem to fall way below those in comparable first world countries. For example, here's a chart from the European Antimicrobial Resistance Surveillance System (EARSS), showing MRSA infection rates:

Why should we have to put up with this?

Surely it's time for Cam to recognise that more of the same - only somehow better managed - is never ever going to deliver the improvements we need. We need a radical change of direction.

And he's the man - the only man - who can deliver it.

Tuesday, March 17, 2009

Banana Deflation


Do you know you've got a banana in your ear?

What?

YOU'VE GOT A BA-NA-NA IN YOUR EAR!

What? You'll have to speak up - I've got a banana in my ear.

Gah - WHY?

To keep the deflation away.

Deflation? But there is no deflation.

I know - effective, isn't it.

*****

Over the last six months we've been lectured constantly that unless interest rates are cut to zero and the printing press cranked up to max, we are doomed to suffer death by deflationary spiral. Those of us who think this is much more likely to end in death by inflationary conflagration have been told we just don't understand (and we may well be bonkers).

But one of Britain's foremost authorities on monetary policy is now speaking up on our side of the argument. In a punchy seven page article, it reviews the supposed costs of deflation, and explains precisely how they've been over-hyped.

It points out that back in the nineteenth century, when Britain was on the Gold Standard (ie our money was tied to gold), prices used to fall routinely, and it didn't destroy our economic growth:


More recently, the price of goods has been through years of decline without apparently undermining our prosperity:




The paper also dismisses the "superficially convincing" argument that falling prices cause consumers to postpone purchases, as "flawed" - the cost of credit being far more important than falling prices per se.

It also points out that falling prices are not nearly as damaging to employment if wages are correspondingly flexible downwards - as seems to be the case in Britain today (see several recent deals to cut wages).

And finally, it notes that the costs of so-called debt deflation (whereby falling prices cause the real burden of debt to increase) are generally pretty small compared to the other things likely to be going in a deflating economy - such as collapsing property values and firms going bust.

And that chimes exactly with what we see going on around us. Our wealth has been shredded, our jobs have been shredded, our nerves have been shredded... the possibility that some prices may be falling a bit is really neither here nor there.

So who is this foremost monetary authority telling us deflation is a sideshow?

Why, blow me down - it's the Bank of England (see Deflation article in their latest Quarterly Bulletin here). The very same Bank of England that is so concerned about deflation that it's just slashed interest rates to 0.5%, and is currently flooding Britain with more money than Zim.

WTF?

The truth is that the deflation bogeyman is being paraded around to distract us from something far scarier: Britain's savers are being pillaged to bail out Britain's debtors.

Because while falling prices increase the burden on debtors, savers gain. For them, falling prices mean that anyone with savings in, say, a simple building society account benefits from an increase in its buying power.

But the Bank is determined to prevent that outcome. Their paper says:

"The key element to... debt deflation... is the transfer of wealth from debtors to creditors caused by an unexpected fall in inflation. Since debtors are likely to have a higher propensity to consume than creditors, demand is likely to fall."

The message is clear: savers are a menace; unless you're prepared to spend spend spend, you shouldn't expect any help from our monetary commissars.

So bananas it is.

Bananas in the ear to ward off deflation.

And banana republic monetary policy to swipe your savings for the use of others.

Friday, March 13, 2009

Lessons From The Graveside


Overlooking the real lessons
We've already blogged the appalling case of Baby P and Haringey Social Services (see here here and here). But in the wake of yesterday's report from Lord Laming, it's worth just making sure we all understand the key lessons:
  • Top-down Whitehall direction via targeting has been a fiasco - Haringey social workers prioritised box-ticking and target fulfilment above exercising their own professional/commonsense judgement on the ground

  • The official inspection regime has been a fiasco - both Ofsted and the Audit Commission issued glowing box-ticking reports on Haringey, even as Baby P was facing death

  • Interagency coordination has been a fiasco - in the end no identifiable person was responsible for saving Baby P

  • Yet another public sector computer system has been a fiasco - Haringey social workers were apparently spending 60-70% of their time inputting reports into their system - no commercial organisation would accept that

It's no wonder nobody wants to work in child protection, especially in difficult areas like Haringey. Individual social workers have little practical authority, yet they can expect to be demonised by the commissars and the national press if anything goes wrong.

Unfortunately, although Laming has identified the problems, he did that once already. And he failed to solve the problem. Yet his solution this time is more of the same - more targets, more rigorously enforced.

Worse, you get the feeling even he doesn't believe it will work. He says:

"It cannot be beyond our wit to put in place ways of identifying early those children at risk of deliberate harm, and to put in place the means of securing their safety and proper development.”


It cannot be beyond our wit - that was almost certainly what Stalin screamed when his centrally directed collective farms failed to deliver the wheat his plan called for.

Surely we've all learned enough by now to understand that workers who are treated as small cogs in a giant state machine are never going to make effective judgements. Their priority is always going to be fulfilling the central plan, rather than dealing with real issues on the ground.

Commissar Balls' remedy is to shoot failing managers and institute yet more training courses. He apparently wants all senior social workers to have Masters degrees. Once again, he entirely misses the fundamental point.

If we expect social workers to take responsibility for safeguarding threatened children, we have to trust them with the authority to take effective action. We cannot bind them into a 500 point checklist laid down by Whitehall, and then expect them to act decisively and quickly as a particular situation demands.
This is yet another area crying out for a more local approach. Instead of laying down yet more requirements from the centre, we should devolve the power back down to individual local authorities, closer to the real world cases.
Yes, individual authorities will also make mistakes. But whatever we do, we are never going to eliminate child killing in the family. Sadly, no country has ever managed that.

Thursday, March 12, 2009

G20 Damage Limitation


How a disaster looks

We are about to shell out £50m on a disaster. That's what it's costing UK taxpayers to stage the doomed G20 bunfight in London.

Now, according to Caroline Flint, the Europe Minister, “the costs of having the summit are far outweighed by the risks involved in not having it at all.” But not for the first time, Caro's got it completely the wrong way round: the risks of having the G20 meeting far outweigh any prospective return on the costs.

Because this meeting is putting up in huge lights some fundamental and scary disagreements on how to tackle the crisis.

In the red corner we have Obama and Gordo, who want to spend us to recovery. And in the blue corner we have Frau M and Sarko, who say we've already done enough spending for now, and we should concentrate instead on rounding up the Anglo-American banking spivs who got us into the mess in the first place. It could get very ugly.

C4 News dug out some newsreel of the last time a British government staged one of these economic disaster summits - the World Monetary and Economic Conference which took place London's Geological Museum in 1933. That was a real hoot, with 66 participating nations, eight Prime Ministers, 20 Foreign Ministers, 80 assorted Finance and other Cabinet Ministers and heads of central banks. Their opening statements alone took a fortnight to complete, and according to Time's account:


"At least one extra King will be there, lean, white-chinned Feisal of Irak, come to watch proceedings, coach his delegates from the sidelines, and renew his acquaintance with two of Britain's most photographed beauties: Lady Louis Mountbatten and the Marchioness of Milford Haven, who visited his arid kingdom unescorted last November in search of desert thrills."

Unescorted thrill-seeking beauties there may have been, but no US President - Roosevelt deliberately stayed away and stymied any effective international agreement.

The meeting was a disaster and it spelled out the message for all to see - it's everyone for himself. The beggar-my-neighbour 30s duly unfolded.

So why are we risking the same thing again now?

True, the saintly one is coming, so that's some advance on 1933. But after all the hype - whipped up especially by Gordo - it's now quite clear the meeting will flop. There will be no substantive agreement on anything, and instead a high risk of entirely contradictory messages spinning off in all directions. Gawd knows how our febrile financial markets will react.

The organisers finally seem to have realised this and panic has set in. The summit is fast becoming a huge damage limitation exercise. People like the appalling Molloch-Brown are appearing on Andy Marr to talk down expectations: this is just a first - though important - step... it's important that we maintain a frank dialogue... blah, blah.

But did any of these people seriously imagine this summit was ever going to be more than another grandstanding opportunity?

Grandstanding on this scale is neither something our delicate public finances can afford, nor something our delicate financial markets can risk.

Wednesday, March 11, 2009

Burned By The Scottish Banking Crisis


Banking firewall

A BOM correspondent in the City is fed up with being blamed for everything, and demands we finger the real culprits. Styling himself Disgusted of T Wells, he writes:

"Why is it that few people have pointed out that we do not have a British banking crisis? We have a Scottish banking crisis.

RBS and Bank of Scotland behaved so recklessly and incompetently that they would have failed with or without a crisis that started in America. They wanted to prove that they were as good as the London banks. They were not.

Lloyds has failed only because it took over Bank of Scotland. Lloyds assumed, without the time for proper due diligence, that BoS’ loanbook could not be as bad as it is (and remember that 80% of the bad debts announced by HBOS were in the BoS part, not the old Halifax)."

And just to be clear about the numbers, including the £585bn of toxic debt guarantees, we have now pumped in getting on for £0.75 trillion to shore up RBS and Lloyds/HBOS - or about half our annual GDP.

Meanwhile, despite all the turbulence, our two big City-based banks - HSBC and Barclays - are so far managing without direct taxpayer injections.

There was a time when your Scottish bank manager was a model of Presbyterian rectitude and prudence. Tyler used to know one who fitted that bill exactly, and was immensely proud of working for the Royal Bank, Drummonds Branch.

But something very bad happened up in Edinburgh over the last decade. A bunch of high rolling chancers took the controls and thought they could take over the world. As Dominic Lawson put it when he wrote on this last month:

"Both Scottish banks were much smaller than the English financial institution [NatWest] they wanted to buy, and both were openly dismissive of the fuddy-duddy "Captain Mainwaring" London management of NatWest who did not understand the modern style of banking, which believed in a much more 'dynamic' use of capital.

In the end... Fred the Shred... took control of NatWest. The deal, in terms of its ability to generate maximum income from a relatively narrow capital base, was the model for the later disastrous bid for ABN Amro, which as we now know, was the final hubristic act resulting in Sir Fred's – and Edinburgh's – nemesis.

I say Edinburgh, because it was Scotland's financial establishment which backed Goodwin to the bitter end. None more so than the once cautious and reliable Standard Life, which, when questions were raised by some London-based investing institutions about the sanity of taking over the deeply troubled ABN Amro, put its entire corporate publicity machine behind Sir Fred...

You might think I am exaggerating the element of specifically Scottish swagger in all of this; I offer as partial evidence the fact that at RBS's annual shareholders meeting in 2007, the directors took their seats to the pumped-in sound of the theme music from Braveheart."

Fantasy Scotland - again.

Lawson picked up a lot of flak for that article - he was predictably accused of being racist. But for English taxpayers this bank bailout is yet another example of one-way money traffic across the border. We already subsidise their economy and public services - even taking account of the oil (eg see here) - and now we're having to clean up their busted banks.

Of course, when it comes to the traffic in socialist politicos, it's the other way round. Our economy has been comprehensively wrecked by raiders from the North.

Now, that Hadrian - he had the right idea...


PS Talking of wrecked banks, I've just listened to an interesting podcast by Prof Julian Franks of the LBS. He explains in simple terms how the implicit guarantee provided by taxpayers to banks reduced their cost of capital, and permitted them to indulge in all manner of highly leveraged craziness. And he points out something we've mentioned previously, which is that before governments provided this guarantee, banks had to be much more cautiously capitalised: he reckons that 100 years ago the capital base of mainstream British banks typically comprised 40% equity, whereas now 5-10% is common. In effect, government has subsidised banks by giving them a free guarantee, which has allowed them to raise debt finance at artificially low cost. Going forward, that has to change. Altough given that the guarantee was never explicit, we still can't understand why taxpayers should have to bail-out the providers of banks' debt capital, and other wholesale creditors (see this post).

Tuesday, March 10, 2009

Pearl Harbour Economics


A debt that will live in infamy

According to Warren Buffett, the current crisis is an "economic Pearl Harbour". And for taxpayers that's a very scary prospect.

Because the original played out very badly. Public spending went through the roof, and government debt ballooned to unprecedented levels which took us three decades to work off.

Here's the IMF's chart showing exactly what happened to official government debt in three of the main WW2 combatants. It was hugely expensive - especially coming on top of WW1 - and by 1945 the UK had clocked up an eye-watering debt burden in excess of 250% of GDP:



It wasn't until the 70s that the UK's burden returned to pre-WW1 levels, and that was through growth and inflation rather than actual debt repayment.

And now here we go again - Pearl Harbour, big spending, big debt, big problem.

But it's shaping up to be even worse than the original. According to the IMF, if we follow our current course, this time there is no prospect of the debt burden ever coming back down again - or at least not in Tyler's lifetime.

Here's their latest projection with an accelerating accumulation of government debt across the G20 economies for the next 40 years:


Now, trust me -that is a world we really don't want to inhabit. Interest rates pushed up by persistently heavy government borrowing, productive investment crowded out, high taxes, low or non-existent growth, high unemployment and probably high inflation as well.

But you know the really worrying bit? This doomsday machine is not triggered by our current Pearl Harbour at all.

Pearl Harbour we could handle. No, the real driver is the increasing burden of our ageing populations.

According to the IMF, for the UK, the net fiscal cost of our Pearl Harbour will be about 30% of GDP, or around £500 bn (net present value).

That's bad enough, but it pales into insignificance compared to the cost of our ageing population. That comes in at an horrendous 330% of GDP, or around £5 trillion in today's terms. Or £200 grand for every single household.

We have only two serious options.

First, we could shoot everyone over say the age of 65. But since Tyler is fast closing on 65, maybe that's not such a great idea.

So let's settle on the second option - raising the pension age much more than currently planned.

After all, as we've blogged before, when state pensions were first introduced, most people died before they got them. So in today's terms, a pension age of 75 would be markedly more generous.

It may sound tough. But post-Pearl Harbour we are going to have to think the unthinkable.

Monday, March 09, 2009

And The Waste Goes On...


Some of BOM's old favourites are in the news again:

Nimrod - at long last MOD is grounding these dangerous old planes pending vital safety work (see many previous posts - eg here).

That has to be the right decision, but it once again reminds us of the hugely expensive shambles surrounding the procurement of the "new" Nimrod (eg see this post). When last sighted, they were set to cost us £290m each - an eye-watering escalation of 205% above the original budget - and were running seven years late.

We have yet to discover any MOD procurement that has come in on time and on budget.

Bogus Gershon cuts - "MINISTERS have spent £900m paying off 15,000 civil servants only to recruit an extra 42,020 in new permanent jobs, according to figures released by parliament.

In the past four years government departments have paid £882m in severance packages, worth an average of £60,000, to staff on voluntary and involuntary redundancy programmes.

Over the same period, however, they have recruited nearly three times as many civil servants, with annual salaries totalling £1 billion, despite government commitments to cutting government waste.
" (S Times)

We've blogged Gordo's make-believe Gershon cuts many times (see all previous posts here). And as this story underlines, the really infuriating thing is not the self-congratulatory nonsense he spouts about their success, but the fact that many of his so-called "cuts" have actually resulted in spending increases.

BBC - "THE BBC is using licence-fee payers’ money to offer 1,600 staff up to £46,000 worth of free rent and bills to persuade them to move from London to the northwest of England.

Details of the “gold-plated” relocation deal, obtained under freedom of information rules, reveal how employees will be able to reside in luxury flats in Greater Manchester during the week while shuttling back to their main family home at the weekend."
(S Times)

We've blogged the BBC's £240m move to glitzy Salford Quays before. By all accounts it's "a crass attempt by BBC bosses to preserve the licence fee amid criticism that they are too “London-centric”. But what we want to know is why aren't they relocating to a really cheap area, like say, Hull?

Waste Warriors - BOM's old friend William Norton has produced another magnum opus on waste for the TPA entitled Paying for the Credit Crunch.

After painstakingly detailing the scale of government waste, he tells us what Cam's government will need to do to tackle it: shrinkage, freezing, elimination, rationalisation, and outsourcing.

Well worth a read... let's hope George does so.

Tonite's Telly Pick - C4 Despatches, 8pm, in which "Journalist and broadcaster Jane Moore investigates how the government is squandering billions of pounds of taxpayers' money."

Government waste as primetime telly - we've come a long way since the last election.

Gordo's Secret Asset Sales

Lewis B has uncovered Brown's latest desperate attempt to raise some reddies.

It turns out he's been secretly flogging off Britain's landmarks on Gumtree, the small ads site (click on images to enlarge):



Well spotted Lewis (whose day-job turns out to be in Life Insurance - something we're all going to need a lot more of in our bleak asset-free futures).

Sunday, March 08, 2009

What Is George Actually Going To Do?


Let's hope he knows how to use those things

As you will know, George Osborne made a big speech on Friday. He got a lot of attention for telling us some "uncomfortable truths": the "money for nothing culture" must end; we must save more and invest more.

It all went down well in many Tory quarters.

Others were less impressed. Liam Halligan reckons that "the rhetoric is still too feeble and explicit policies barely exist".

So skipping the rhetoric, what did George actually promise to do?
  1. Financial regulation - "tougher regulation of bank lending in a way that dampens the credit cycle instead of amplifying it... for reforms to the failed tripartite system of financial supervision, returning more powers to the Bank of England to call time on excessive debt." We say good... but it needs a lot more detail. How do you tell a structural shift from a cycle? What constitutes excessive debt? Who decides?
  2. New business start-ups - government to put in cash either "through co-investment along the lines of the Prudential's new UK Companies Financing Fund, or a new Industrial and Commercial Finance Corporation - which became today's 3i". We say gulp! We really don't need a return visit from Wedgie Winner Picker.
  3. Cut Corporation tax rate - "already committed to reduce the headline rate from 28p to 25p by reducing complex reliefs and allowances, but we will need to go further if we are to keep pace with an increasingly competitive global economy". We say excellent.
  4. Cut tax deductibility of corporate interest payments - "Our corporate sector's excessive dependence on debt is deep rooted... our corporate tax system favours debt financing over equity. Interest costs are fully deductible with very limited restrictions, while the returns on equity receive little or no tax relief... But by reducing the tax breaks for debt we could potentially fund a significant reduction in the headline rate of corporation tax - a key determinant of our international competitiveness." We say wow! We agree that Brown caused immense damage to company financing though his pensions tax grab, and have blogged it several times (eg here). So in principle, a move to make equity financing cheaper is good. But given that interest is tax deductible in most other major economies, George would need tread very cautiously.
  5. Public spending - "We will come off Labour's unrealistic spending plans. We will bring about major reforms to the culture of Whitehall, putting the emphasis on value for money. And we will overhaul the way government spending is controlled by creating an Office of Budget Responsibility to act as a rod for the back of all future Chancellors". We say hurrah... but... we still need a bankable fiscal strategy, with quantified targets for getting spending down. And we have zero confidence that George would be any better at reforming Whitehall culture than Gordo was: he needs to chop entire activities.
  6. Public service reform - "whether it is Michael Gove's radical plans for Swedish-style school reforms, or the plans for real welfare reform that Theresa May and David Freud are developing, it is the Conservatives who are now driving the reform agenda. Reform is vital for its own sake - to deliver real improvements in services. But the fiscal crisis has created a new imperative." Spot on. With the money gone, radical reform is the only option. Schools and welfare for sure. But he unaccountably missed out the other key area - the NHS.

Pulling it all together, we can see he's on the right general track (except for picking winners that is). But with just a year to go before he takes over, we need a lot more detail.

In particular, we're still waiting for George to set out his medium term fiscal strategy. As we've blogged many times, our ballooning government debt makes it absolutely essential we retain the confidence of the international bond markets. Public spending is way above what we can now afford, and the markets want to know how George will bring it down. Rhetoric won't be enough -they are going to expect some chapter and verse.

And just so we all understand the scale of the task, the IMF says that if George is going to get our debt/GDP ratio back down to 60% - widely judged to be the maximum long-term sustainable level - fiscal policy will need to be tightened by around 4-5% of GDP. Which is a lorra lorra money - equivalent in today's terms to a spending cut of around £60-70bn pa (roughly 10%).

It's Big Scissors time alright. And I for one would be a lot more comfortable if I could be sure George had a coherent strategy for wielding them.

We'll be blogging further on this during the week.

Saturday, March 07, 2009

Sharing The Pain


A decent man in a snakepit

Stephen Timms is Financial Secretary to the Treasury. He is also a calm, intelligent, decent man.

How do we know? Because once in a another lifetime, Tyler used to see him regularly in a financial services customer/supplier relationship. An unlike certain other customers, Timms always impressed with his ability to grasp new and sometimes difficult issues, his willingness to take decisions, and perhaps most of all, his unfailing courtesy, even in "trying" circumstances.

These days, he's down in the Treasury snakepit wrestling with a python - how to rescue our banking system without bankrupting the taxpayer. And as the struggle gets more desperate, he's increasingly the one who gets pushed out into the Lamont memorial spotlight to explain just WTF they're doing down there.

This morning we got news of the latest bank bailout. Taxpayers are being stuffed with another £260bn of toxic assets to add to the £325bn we've already taken on from RBS (see this blog). And for providing this insurance, we're not being paid a cash fee but another huge dollop of Lloyds equity. Altogether, we could end up owning 75% of the company, which is as close to being nationalised as dammit.

On BBC R4 Today this morning, Evan Davis asked Timms three key questions:

  1. How much are taxpayers going to lose?

  2. Was forcing Lloyds to buy HBOS a mistake - haven't they simply spread the contagion and brought down a perfectly good bank along with a bad one?

  3. Why aren't the wholesale lenders - whose loans it was that funded the banks' lunacy - being forced to share the pain? Why are taxpayers guaranteeing them as well as retail depositors?

Timms did his best, but his answers were not reassuring.

He has no idea how much taxpayers are going to lose. But in reality, the £260bn of assets we're guaranteeing aren't called toxic for nothing: they are the worst junk in the Lloyds HBOS portfolio, and they have been selected by the insured. We could easily lose the lot.

On the second question, according to Timms it was Lloyds' idea to take over HBOS, so creating this Big Bad Bank was not the government's fault. Hmm.

The third question is the most critical, and it's one we've raised before. Just why should we UK taxpayers be forced to guarantee the wholesale creditors - many of them overseas - of our busted banks?

Because these people are not naive retail depositors who couldn't be expected to know what the banks were up to: they are professional investors and bankers who should have been fully aware of the risks our banks were building up.

And if they had been lending to, say, a manufacturing company rather than a bank, there'd be no question of bailing them out. They'd have to take their chances in a liquidation. So why aren't we enforcing the same rules with the busted banks?

And just make sure you understand this - by guaranteeing the banks' liabilities to wholesale creditors, we are taking on way more than would be necessary to guarantee only retail depositors.

Of the £7.2 trillion of UK banks' liabilities at end 2008, (see Feb 2009 FinStats) only £1.1 trillion comprised retail bank deposits - the kind held by those people who queued on the pavement outside the Crock. All of the remaining £6 trillion - yes, £6 TRILLION - comprises liabilities to wholesale lenders and investors. That's a whopping 4 times our GDP, or £250 grand per household.

We should be very scared. This government is already accumulating debts on a massive scale, and Timms reckons they have no idea how big the losses could be. In the real world, guaranteeing liabilities of 400% of GDP is way beyond the capacity of HMG to carry.

So why? Why should taxpayers shoulder this burden? Why don't we simply say to the wholesale creditors - as we've already said to the equity shareholders - you should have known the risks, and now you must take the consequences. You cannot expect taxpayers to bail you out.

Which is of course the Prof's (Buiter) Good Bank proposal (see this blog). The government establishes a new Good Bank (or banks), takes all the retail deposits and a corresponding amount of good assets from the bad banks, leaving the bad banks with the residual, largely problem, assets, their wholesale liabilities, and their shareholders.

The bad banks effectively become investment funds holding a pile of run-off assets which may or may not realise value in the long-term. But whatever happens, there is no further call on taxpayers.

There are several variants of the same basic approach, including the banks splitting themselves into good and bad banks (which is sort of what RBS has done). But the central feature of all of them is that taxpayers are not required to guarantee either shareholders or wholesale lenders.

Yesterday Martin Wolf waded in, starting with a graphic description of Timms' python:

"The UK government looks increasingly like a python that has swallowed a hippopotamus. In acting as insurer of last resort to the British-based banking system, it is taking on huge risks on behalf of taxpayers. If this turned out to be a global depression, with huge losses for British-based banks, fiscal solvency might even come into question. Can this make sense? I doubt it."

But even though he doubts it makes sense, Wolf reluctantly concludes we have to do it anyway:

"First, the possibility of a default [on wholesale liabilities] would create a wave of panic worse than the one that followed the bankruptcy of Lehman last September; and, second, for this reason, no individual government could dare to go it alone."

So we're back with TINA: unless taxpayers accept their stuffing things will be even worse.

The trouble is, TINA herself can have no idea how this is all going to play out. How does she know this blanket bank guarantee won't undermine HMG's credit, undermine sterling (even more), and drive us banana republicwards?

According to the IMF, as at mid-February, the UK government had provided explicit support to the financial sector (capital, guarantees, and asset purchases) equivalent to 47.5% of GDP. That was the second highest in the G7, behind only the US (on 74%).

But that was before the latest support packages for both RBS and now Lloyds. Taking account of those, Tyler's fag packet says that explicit overall support is now in excess of 80% of GDP - the highest in the G7.

And unlike the bashful Mr Timms, the IMF has attempted to calculate likely losses from all this support. While they haven't published the UK figures separately, they say that if "market disturbances" get worse - as they already have - the big industrialised countries could expect to lose 15-22% of GDP from these blanket guarantees. Which in our case would be £200-300bn, or two years of the NHS budget. And frankly, that sounds optimistic.

Nobody would start from here, but pain on this scale simply cannot be born by taxpayers alone.

Wholesale creditors must be made to take their fair share.

PS This IMF paper is a very scaaaarrry read. Looking beyond the current crisis, it explains how the fiscal hangover will interact with the escalating burden of ageing populations to keep us all on the edge for decades to come. You will be tightening your belt so far you'll need to punch half a dozen extra holes.

Friday, March 06, 2009

Happy Birthday Dear TPA


Last night the TaxPayers' Alliance celebrated its fifth birthday. Happy birthday to you.

In five years the TPA has gone from a standing start to be Britain's most high profile campaigning group. It now has 20,000 members (join now - it's free), 1500 activists, hundreds of so-called "media hits" every month, and an energy that most organisations can only dream of.

One telling measure of its success is the attention it now gets from the supporters of Big Government. Indeed, Pol recently devoted an entire column to the TPA, or the rottweillers as she describes them:
"Drip, drip, drip. Day after day an insidious poison is fed into the nation's veins, spreading anger and cynicism about everything in the public sector...

Behind this campaign is the Taxpayers' Alliance (TPA), which claims an average of 13 hits a day in the national media. Its press releases go virtually verbatim into full-page stories in the rightwing press. More surprising is the BBC's lazy, unquestioning use of these propagandists as if they were neutral analysts, without saying who they are."

Which coming from the left - whose campaigners are constantly quoted as neutral analysts - is pretty rich. Like, why isn't Pol introduced on Newsnight as a leftwing campaigning journo? (and see here for the TPA's measured response to Pol's ill-informed vitriol).

The left is so rattled it has even gone to the length of establishing a spoof TPA website - The Other Taxpayers Alliance. Sadly, it's pretty sparce, largely comprising links to articles by Pol.

Talking to other TPA supporters last night, everyone was agreed that Matthew Elliott and Andrew Allum have done a fantastic job building the TPA - as someone said, it's easy to have an idea, but much more difficult to see it through.

But TPA success is about much more than that. The fact is that after a decade of high tax, high spend, failed Labour, millions of us are crying out for a change of direction. Yet the Conservatives under brand decontaminating Cam have sytematically downgraded the importance of tax cuts. There was a void - we needed some campaigning organisation to speak up for taxpayers in a focused coordinated way (just as similar organisations have long done in most other developed economies).

So the TPA has been meeting a demand. It is the right organisation, in the right place, at the right time.

And the way things are looking in our high tax, high debt future, taxpayers will need the TPA more than ever.

PS Last night's celebration also constituted a book launch. Matthew Elliott has co-authored a new book with David Craig entiltled The Great European Rip-Off - How the Corrupt, Wasteful EU is Taking Control of Our Lives.


David will be known to BOM readers as the author of previous books about government waste, including Rip-Off!, Plundering The Public Sector, and Squandered. Tyler bought his copy last night, and he urges you all to do the same. We'll be blogging it once read.